Below are a few simple lessons I have learned over the years that may help you as you consider your portfolio during the current “turn” in markets.

1. Be aware of the quality of the businesses you own.  Don’t assume a stock “will always come back” if you hold through, “because it’s a great business”.  Know the business.  We have undergone a change from easy monetary and fiscal policy towards a more disciplined backdrop, and that has wide ranging effects on not just markets but also customer behavior.  Consider that Intel (INTC) was the beneficiary of a cyclical boom in the late 1990s, and enjoyed a high multiple on the belief that boom was secular.  Everyone thought housing could not miss in 2006.  Today is a great time to consider what customer behavior is sustainable vs what is cyclical.  The market is giving you clues that should not be ignored, particularly across the fintech sector.

                      Year 2000 Intel Dip Buyers continue to wait for $100

        2. What customers does a bank or fintech sell to?  This informs the point about sustainable business quality above.

• • Main Street generally seems ok in the current backdrop, particularly in services, as covid recedes.  Over long periods, Main Street is the most important constituency for both political parties.
  • Subprime consumers, where much of fintech focuses, may be under stress as benefit and stimulus checks run out.
  • Some banks service fintech and crypto.  Those banks may not grow as much as markets had hoped.  Markets seem to increasingly grasp this with banks like Silvergate (SI) and Customers (CUBI).  It may still be adjusting at Signature (SBNY) and Provident (PVBC), while Coastal (CCB) may also see some customer volatility. (This blog does not advise its readers and encourages you to form your own viewpoint).
  • Some fintechs focus on generating loans.  Loan generation is not as valuable as rates change, because higher rates may create deposit pricing pressures, lessening the need to find new loans.
  • Mortgage also has a difficult near term outlook with higher rates, due to fizzling refinancings.  There is a mortgage-heavy bank, Metrocities (MCBS), in Atlanta that is also liability sensitive per 3Q 10Q, trading at around 2.5x tangible book.  Liability sensitive means less spread income when rates rise.  The coming quarters could be challenging for Metrocities’ management team.

          3. Who owns the company?  Consider two investor bases

Company 1 is owned by 10 people.  Four are on extended vacation.  Two are widows who don’t check the market. Two are in management and two are local professionals who know the company well.  Sometimes, I suspect Truxton (TRUX) is owned by the people above.

Company 2 is also owned by 10 people.  Three run pods in New York for a large trading desk and are checked daily by risk and portfolio managers.  Four run money for 20% incentive fees, with twitchy allocator clients like this one Big Short Scene with Scion Capital and three more are management with a history of selling stock during every window.

When company 2 falls 50% while Company 1 doesn’t move, some might think it’s “irrational”, but it would make perfect sense.

           4. Is there a dedicated buyer?

Oriental Financial (OFG) among other Puerto Rican banks may be able to buy back up to 10% of its shares outstanding at the moment.  I am not aware of many fintechs with an ongoing buyback, although perhaps Robinhood (HOOD) could consider one given it reports $6.5 billion in cash and is now valued at under $10 billion.  Unfortunately, Robinhood seems to have issues with the points above, specifically they seem to serve all the wrong folks, at the wrong time, and the company is (or was) owned by sophisticated, short-term oriented ownership.

          5. You can use volatility to your advantage.   

Find yourself on the opposite side of forced sellers, in equity, options and bond markets.  While it can be hard to know when markets resume their upward slope, it’s not hard to understand episodes of capitulation, which tend to involve panic selling with wide breadth, and you may be able to profit from these episodes.

About us: Colarion is a diverse investment advisor, with expertise in the financial services sector. The firm manages both separate accounts and a pooled sector fund. For additional detail you may contact us below or see: http://www.colarionpartners.com

Disclaimer: The writings in this note do not advise readers on investment transactions. Only clients who have executed an account management agreement with Colarion LLC are under advisement from Colarion, so that their particular tolerances and objectives may be considered. Readers should assume Colarion may be long or short any and all tickers mentioned in this publication, and that investing in securities includes inherent risks which may lead to the loss of capital.